Making Sense Of Canadian Real Estate Prices

Is there are direct relationship between Canadian real estate prices and money supply?

Real estate is subject to supply and demand like any other goods that are in demand by people. The increase in Canadian home prices when compared to the increase in the prices of crude oil and gold, showed a close relationship with the supply of money (both in Canada and the global supply of money).

The table below clearly show the gain in prices for real estate, crude oil and gold are directly related to the supply of money over a 20 years period.

Time Period	Jan/1990	Jan/2000	Inc. 1st 10 Yr	Jan/2010	Inc. 2nd 10 Yr	Inc. 20 Yr
Van SFH	$300K	$380K	27%	$950K	150%	216%
Van Thse	$190K	$220K	16%	$355K	61%	87%
Cdn $ Supply	$18 Billion	$33 Billion	83%	$55 Billion	67%	205%
Global $ Supply	US$17 Trillion	US$26 Trillion	52%	US$64 Trillion	146%	276%
Crude Oil/barrel	US$20	US$27	35%	US$68	152%	240%
Gold/oz	US$380	US$280	-27%	US$1100	293%	189%

Charts and data source: Real Estate Board of Greater Vancouver, DollarDaze.org and Kitco.

First 10 years - 1990 to 2000

The gain in home prices for single family homes and townhomes in Greater Vancouver were 27% and 16% respectively. The increase in crude oil price and the supply of money were 2 to 3 times more. During this period, there was a rapid gain in home prices from 1990 to 1994, followed by 5 years of price decline when capitals were moved back from Canada to China. Immigrants from Hongkong and Taiwan sold their homes and move money out of Canada after the hand over of Hongkong to China.

Second 10 years period - 2000 to 2010

The rise in Vancouver single family home prices, crude oil and gold followed closely with the global supply of money. Although the Canadian money supply was increasing at half the rate of global money supply, money from around the world and China could have been recycled and invested in Canadian real estates. The rapid expansion in liquidity around the world resulted in real estate prices all over the world, making double digit gains.

New money fueling home sales

The rapid rise in home prices, easy money policy from CMHC and low interest rates all helped to fuel the real estate boom in Canada. Canadian banks were very liberal in granting “home equity lines of credit” to home owners whose homes had doubled in values. Home owners and investors made very handsome gains in their real estate purchases over the past 10 years.

Will real estate prices collapse?

After a huge run-up in prices since 2001, many are wondering when they will be a correction in home prices. There were time periods when the market appeared to crack and roll over. But, this has not happened.

The above data showed that real estate prices seemed to co-relate with the global supply of money. The Chinese economy over the past 10 years had grown at just over 10% a year, and the momentum appears to be able to be sustained for the foreseeable future.

Money from China has a direct and significant impact on Canadian real estate prices. Canada is a favoured country for immigration by mainland Chinese families and immigrants from around the world. British Columbia will continue to enjoy positive inflow of money and new immigrants. Rich Chinese immigrants are making an impact on home prices in Vancouver Westside. Overall, real estate in BC will benefit from the demand for housing by new immigrants.

Read other Metro Vancouver real estate news here.

Historical listing data for Greater Vancouver

Home prices are affected greatly by the supply and demand for homes by home buyers and sellers. The chart above from the Real Estate Board of Greater Vancouver showed a steady drop in listings (reported for the month of December) of 1997 to 2003.

The supply & demand chart to the left showed that the housing market suffered an overload of supply when sales dropped sharply between April 2008 to March 2009 as a result of the credit crunch.

Home prices dropped by 15% or more in less than a year. However, by May 2009, home buyers returned in large drove, bidding up prices as there were more buyers than sellers.

Buyer vs Seller market

The balance of power between buyers and sellers can be tracked by following the list/sale ratio graph below:

The running 3-month list and sale ratios as shown on the chart to the left for 2008 and 2009 showed that there was more up-ward pricing pressure since July 2009 when the list to sale ratios was less than 3.

The market can only re-balance when more supply is coming into the market, or the sale pace slow down. It will appear that this may not happen until after the second half of 2010.

The housing market after the winter Olympics

While the public are inclined to speculate that the market will slow down after the winter Olympics, there are others who are cautiously optimistic that that housing market may be able to sustain at current level of activities. If a stable supply and demand for homes can be maintained, CMHC and others maintained that a moderate price gained for 2010 can be expected.

The next few months list sale ratios will be able to tell us more about the future direction for metro Vancouver's housing market.

View Vancouver homes for sale.

BC November Residential Sales

November Home Sales Continue at Torrid Pace

Vancouver, BC – December 9, 2009. The British Columbia Real Estate Association (BCREA) reports that Multiple Listing Service® (MLS®) residential sales in the province climbed 165 per cent to 7,182 units in November compared to the same month last year. Last month posted the highest number of MLS® residential sales for the month of November since 2005, when 7,721 units changed hands. Triple-digit gains in province-wide unit sales reflect a low number of unit sales in November 2008.

“BC home sales remained at an elevated level in November,” said Cameron Muir, BCREA Chief Economist. “Low mortgage interest rates, pent-up demand and strong consumer confidence continue to be key drivers in the market.”

The torrid pace of home sales in the Fraser Valley, Vancouver and Victoria has propelled the provincial total to near record levels. However, consumer demand in these markets is expected to moderate in the new year as pent-up demand is largely expended and higher home prices erode affordability.

Year-to-date, MLS® residential sales dollar volume increased 21 per cent to $36.8 billion over the same period last year. A total of 79,325 units were sold in the first eleven months of 2009, up 19 per cent from 2008, while the average MLS® price increased 2 per cent to $463,555.

View Vancouver homes for sale.

Metro Vancouver Housing Trend

Housing trend since 1977

From 1997 to 2001

Greater Vancouver's last bull market started towards the end of 1984. and lasted until the end of 1994. Home sales dropped yearly, along with home prices and reached a bottom around 1998. View the price chart here.

From 2001 to 2007

When buying interest returned to the market in 2001, you will notice that there was not enough supply of homes to keep pace with demand. New home construction was pushed to the limit, as strong demand for housing continued un-abetted until the end of 2007. From 2001 to 2007, home prices more than double in values.

The correction in 2008

The credit crunch in 2007 and early 2008 caused a major pull back in buying interest, resulting in home prices declining 15%. The panic of 2008 was quickly replaced by market optimism, when interest rates were slashed from 4.5% in Nov, 2007 all the way to 0.25% in Apr 2009.

Will home prices collapse?

There are great concerns in the market place that home prices are too high. There are major concerns on higher interest rates, pending HST which will affect the housing market and the weak Canadian economy in the midst of a world wide recession.

The metro Vancouver housing may be at the cross road. Market confidence is the key. Home prices are hinging on what happens after the winter Olympics, interest rates, HST implementation and the economy.

View Vancouver homes for sale.

The Canadian Real Estate Debate Goes On

Canadian Columnists Linda Leatherdale on 2008-05-04 posted on Canoe Money a timely article on the Canadian Housing Market - "Opening door on market"

"Some feverishly argue there's no way Canada's real estate market will crash and burn like the U.S. market, where one prominent analyst warns that the meltdown is more fast and furious than during the Great Depression".

"Others say, get real: Canada's largest trading partner is the United States, and if this one-time economic superstar is in a recession, we're going down, too".

Read the full article here.

The Royal Bank of Scotland recently released an advisory to its clients to braise for a "global stock and credit crash" over the next 3 months. The UK housing market may not recover until 2015. The housing market and debts problems in the US and UK, record high energy and food prices could eventually drag Canada into a housing down turn as we experienced in 1995 to 2001. Except, this time the problem could be very much worse than what we experienced previously.

Greater Vancouver Housing Market

The Saunder School of Business's housing chart for Greater Vancouver below shown that it took 8 years for the housing market to recover to it's 1981 peak at around $240,000. The housing downturn from 1995's peak at $420,000 took almost 9 years to recover. Using the charts presented here up to 2007, and plotting the trend lines for nominal and real prices, $540,000 seemed to be about the "right" price level where the Vancouver housing price should be. This represents a 30% to 35% price differential below the current Vancouver nominal and real housing prices.

Click here to read the blog.

View Vancouver homes for sale.

August 2007 Housing Index for Greater Vancouver

According to the Greater Vancouver Real Estate Board's August 2007 report on house prices and sale activities, the demand for housing continue to be positive. The average sale prices for apartments, townhouses and detached homes are:

Apartments: $367,944
Townhouses: $446,577
Detach homes: $726,067

With the average Greater Vancouver household income at $63,300, home buyers are squeezed out of the home ownership market. Or, they are forced to buy the most affordable apartments as shelters for their families.

While Vancouver house prices are consistent with pricing trends for the above types of dwelling, there is a market disconnect with "affordability" and "average prices" in other major Canadian Cities. If you take a look at the various charts as presented by Brian Ripley here, you'll find that Vancouver home owners are bearing a much heavier cost in home ownership.

Our average detached home prices are twice as much as that in Calgary and Edmonton and Toronto detached home prices are only around 40% of that in Vancouver. Ottawa and Montreal prices are at about one-third the price in Vancouver, have the most affordable detached homes in the country.

House prices are subjected to the economic law of supply and demand. We have a high housing prices situation in Vancouver for a long time.

We must find out why there are such disparity in home prices, and what can be done about it. The provincial Government in BC should be the first to be questioned on their housing policy for limiting the supply of "land" for housing.

Is the Agriculture Land Reserve that control vast urban land parcels still relevant in serving the well being of British Colombians? Urban town planners are urging for better utilization of land resources. Farming for agriculture lands bordering the city centers is not the best and highest use of these land parcels.

Until there are urgency and agreement by the Governments taking action to ease the land supply problem, the critical housing affordability problem in Vancouver will not be solved.